Global Policy Forum

Downgrade Downer - France Angry at Credit Rating Gaffe


According to an email erroneously sent out by Standard & Poor's last Thursday, France had lost its AAA rating - an eventuality which resulted in the New York Stock Exchange falling and the euro losing against the dollar. French Finance Minister François Baroin argued that this mistake could plunge France into the same kind of difficulties that Italy is currently experiencing. Similarly, European politicians have accused the three biggest rating agencies S&P, Moody's and Fitch of exacerbating Europe's debt crisis through their downgrades. Rather than fussing and screaming about Standards and Poor’s “technical glitch,” the question of reforming a system in which so much power is granted to a rating agency ought to be asked.    

November 11, 2011

The French finance minister has reacted angrily to a credit-rating gaffe by Standard and Poor's. The agency accidentally sent out an email suggesting that France had lost its triple-A rating. Many are asking how the firm could have made such an embarrassing slip-up at a time when markets are especially jittery.

First Greece, then Italy and now France? That, it would seem, was the message of an email erroneously sent out by Standard & Poor's to several of its customers on Thursday. According to the message's subject line, France had lost its AAA rating -- an eventuality which could plunge the country into the kind of difficulties currently being experienced in Italy. It was only one-and-a-half hours later that the mistake was corrected.

According to a statement by S&P, a technical glitch resulted in the automatic message being sent to subscribers of its Internet site Global Credit Portal saying that France's rating had been changed. S&P emphasized that this was not the case and that France was retaining its AAA rating with a stable outlook. The company said that anyone who clicked on the link in the email, which featured the subject line "DOWNGRADE," would have seen that France's rating had not changed.

The New York Stock Exchange temporarily fell as a result and yields on French 10-year sovereign bonds jumped 27 base points to 3.46 percent. The euro also lost ground against the dollar.

'Shocking' Mistake

French Finance Minister François Baroin called the mistake "shocking" and demanded an immediate investigation into the incident by European and French regulators. The French stock-market regulator AMF reacted by launching an investigation. The European Union regulator ESMA and the US Securities and Exchange Commission are also expected to look into the incident.

The gaffe could hardly have happened at a worse time. In recent weeks there has been speculation that France could lose its AAA rating as a result of French banks' exposure to Greek debt. In mid-October, Moody's had warned that the country's AAA rating could be in jeopardy unless the government made an effort to get its finances under control during the next three months. Furthermore, market nerves are particularly frayed at the moment given uncertainty over the political situation in Greece and the risk that the euro crisis could engulf Italy, the third-biggest euro-zone economy. For French President Nicolas Sarkozy, who is running for reelection next year, it is vitally important that France keep its triple-A rating.

"Can you believe this?" one unnamed French official told the Financial Times. "This is not going to please people. … In the situation we are in at the moment, you can't play around like this."

"This was the first day when we got the feeling that France could be infected by the crisis," a French trader told the newspaper Le Nouvel Observateur, referring to the fact that French bond yields had jumped by over 25 percentage points.

"Given how important these sovereign ratings have become and how on edge markets are, for S&P to accidentally send out a note like this borders on comical," said Michael Church, head of an investment-management firm, in remarks to the Wall Street Journal.

Criticism of Big Three

One former S&P analyst told the Wall Street Journal that the fact that an alert was ready in the system suggested that the rating agency could be in the middle of a review of France's creditworthiness.

The gaffe came on a day when the European Commission had forecast that the French economy would only grow by 0.6 percent in 2012 and urged France to take further steps to make sure its budget deficit gets under the EU limit of 3 percent of gross domestic product in 2013. Finance Minister Baroin insisted that the country was already doing enough to cut its deficit, however.

The incident is unlikely to improve the reputation of the "big three" rating agencies. Many European politicians have accused S&P, Moody's and Fitch of exacerbating Europe's debt crisis through their downgrades, and there have been repeated calls for the current rating-agency system to be reformed.

In October, S&P downgraded Spain to AA- from AA. The country was also downgraded by Moody's and Fitch. In September, the big three had previously downgraded Italy. S&P currently gives the country an A rating.


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